SAN FRANCISCO _ When voters overwhelmingly approved California's novel $3-billion stem cell initiative, they counted on a promise spelled out on the ballot: The state would earn back as much as $1.1 billion in royalties from scientific discoveries.

But those hypothetical profits are now looking increasingly dubious.

The California Institute for Regenerative Medicine last month proudly rolled out a groundbreaking plan to require universities and nonprofit research institutes that receive public grants to channel a 25% return back to the state on discoveries yielding more than $500,000 in revenues.

But in recent weeks, the University of Wisconsin foundation that claims broad patent rights to all embryonic stem cell lines in the U.S. has vowed to demand payments from California. That could spur a bitter court fight, even as pending litigation has so far kept the state from issuing the voter-approved bonds.

"Theoretically, could they close down research activity in California? Yes," said Ed Penhoet, vice chairman of the institute's oversight committee.

A spokesman for the Wisconsin Alumni Research Foundation said talks with the institute are continuing. "We feel there should be a discussion about how the University of Wisconsin gets a benefit," Andrew Cohn said.

Meanwhile, representatives of private biotech companies made it clear to institute board members Wednesday that major companies with the ability to bring cures to market are unlikely to seek state money if too many strings are attached to those dollars.

"I don't think you're sitting in a position where all these companies will come on their knees to visit you," Brad Margus, chief executive of Mountain View, Calif.-based Perlegen Sciences Inc., warned the institute's intellectual property subcommittee.

He said that only second-rate companies would be interested. "You need to have first-draft picks, not companies who are desperate," he said.

Industry's key concerns, Genentech Executive Vice President Stephen Juelsgard told the committee, are that the state will dictate how much companies can charge for new treatments; maintain the right to patent technology, if companies fail to do so; and require companies to share developments they consider proprietary. Major companies "simply wouldn't engage," Juelsgard said. "It's not a risk worth taking."

The comments came in the first of three meetings to hash out what the state will require from private companies that receive Proposition 71 funds.

Zach Hall, the institute's president, said he is confident a compromise can be found. "There is a heightened sense that this is a public project. As part of that there is an expectation that there will be a very tangible return," Hall said. "Yet we know that if we are going to have therapies that are widely available _ the private sector will have to be involved in a very fundamental way. The trick is to satisfy both of those needs. We don't expect that everybody will be happy."

If the institute adopts an overly restrictive policy and top-flight companies do not apply for funding, the governing board could tweak its terms, Hall said. The same could occur, he said, if the requirements prove too lenient and not enough return flows to the state.

But the balancing act could prove tricky.

The clash is the latest incarnation of the public-private tensions that have plagued the enormous initiative, which promises to dedicate $3 billion to the young science over a decade.

Patient advocates and taxpayer watchdogs are insisting that the public dollars not be spent without ample public oversight _ and monetary public benefit.

Californians "never intended a blank check for biotech," said John Simpson of the Foundation for Taxpayer and Consumer Rights. "The state should hold the patents."

State Sen. Deborah Ortiz (D-Sacramento), meanwhile, has introduced legislation that would send amendments to Proposition 71 to the ballot for a vote. Among them: a requirement that every grant or loan recipient share half of net licensing revenues with the state if the state shared the expense of developing or protecting the patent. The share would be 25% if the patent was developed without state help.

"We're putting money in. We should get more out," said Ortiz spokeswoman Hallye Jordan.

The conflicts could curtail California's attempt to lead the nation in embryonic stem cell research _ all but banned by the Bush administration in 2001 for religious and philosophical reasons because the cells are sometimes drawn from discarded embryos. But most of the Republican presidential candidates vying for the 2008 nomination have pledged to undo the restrictions. That means some federal grant money _ with few strings attached _ could soon flow to California.

"The clock is ticking," said Stanford economist Roger Noll, who predicted that California researchers would turn to less restrictive federal grants, meaning the institute "will have a minimal impact on the progress of this research."

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